SME promoters borrow in personal capacity for biz

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Somasroy ChakrabortyAbhijit Lele Mumbai
Last Updated : Jan 21 2013 | 1:22 AM IST

Promoters of many small and micro enterprises are borrowing money from banks in their personal capacity to finance business ventures, as lenders become cautious in offering credit to these firms due to the uncertain macro-economic environment.

The rates at which promoters are able to borrow by pledging their assets with banks are often cheaper than interest rates payable on unsecured loans raised by some small and micro companies.

"Right now, it is a period of promoters borrowing in their personal capacity, and then lending it to their own businesses. Many promoters are taking a loan against their personal property and using it as capital for their business," Amitabh Chaturvedi, managing director and chief executive of Dhanlaxmi Bank, told Business Standard.

He said while small and mid-sized firms were currently paying 13.50-14.50 per cent on bank loans, the promoters were able to borrow these funds at a rate that was 75-150 basis points cheaper, by offering their properties as securities.

According to a senior State Bank of India official, in many cases, banks have asked promoters to infuse more capital in their business, as the debt-equity ratio of many of these firms continues to remain high. Hence, many promoters are borrowing funds from banks in their individual capacity, and injecting the money in their business as capital.

"Banks want to limit their credit exposure. Otherwise, there is a high risk of default. Banks insist promoters bring in additional funds. This is one way through which they are raising additional capital for their businesses," the official said, requesting anonymity.

Bankers said in the current environment of slow economic growth, the financial positions of many small and medium enterprises, especially in export-oriented sectors, were being stretched. With receivables being delayed and order pipelines shrinking, banks were not keen to offer additional loans to these firms.

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"If the promoter has a property that he can offer as security, he can get loans from banks. But his company may not be in a position to raise additional money. It makes sense that he takes a loan on his own, and infuses it as capital, or shareholder loan, into the business. It is happening, but we cannot say if this has become a trend," said a senior official of a private bank.

According to senior IDBI Bank officials, instances of promoters borrowing in their own capacity and then lending to their businesses have gone up because of the current high interest rate regime and slowing economic activities.

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First Published: Dec 02 2011 | 12:10 AM IST

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